By Markos Moulitsas - 08/09/11 11:40 PM EDT
To hear Republicans spin this week, the S&P downgrade of the nation’s finances is directly tied to President Obama’s economic stewardship. And why not? Hey, I’d try to point the finger at someone else if S&P were implicating me.
Remember, the debt-limit deal was a complete GOP victory. “I got 98 percent of what I wanted. I’m pretty happy,” crowed House Speaker John Boehner (R-Ohio) after the debt deal was announced. He had reason to crow, considering he quelled a rebellion among his Tea Party faction by acceding to its hostage-taking demands. Even Tea Party champion Rep. Allen West (R-Fla.) voted for the deal. It was a complete capitulation by the Democrats.
Republicans learned that economic terrorism works, and both Boehner and Senate Minority Leader Mitch McConnell (R-Ky.) vowed to make economic hostage-taking a model for future negotiations. When you negotiate with terrorists, it only emboldens them.
Enter the S&P downgrade, and its assigning of blame to Republican intransigence.
In its report, S&P cited GOP brinksmanship as a reason it had lost faith in the nation’s political process: “the threat of default ha[s] become political bargaining chips in the debate over fiscal policy.” Republicans might not believe it, but investors like to know they’ll get paid.
S&P also boosted projected deficits by almost $1 trillion based on the GOP’s unwillingness to accept revenue increases. The agency’s original baseline assumption assumed that Bush tax cuts would expire for the wealthy while middle-class tax cuts would be extended. They no longer believe that will happen. “We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act,” the agency wrote.
To be sure, S&P also mentioned the need to address entitlement cuts, but the broader thrust of the downgrade wasn’t financial, it was political. The ratings agency doesn’t trust Republicans to protect the nation from default or to make the revenue adjustments necessary to pay off the debt from the GOP’s tax cuts and spending binge of the last decade.
Still, the markets don’t seem too freaked out about the nation’s financial picture. If investors were worried about the U.S. paying off its debt, they didn’t show it — yields on 10-year bonds were down, which meant demand was up. In other words, while investors dumped stocks, they were snatching up U.S. government debt. “This amounts to a massive market rejection of S&P’s concerns,” wrote Nobel Prize-winning economist Paul Krugman. “The ‘signature’ of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk.”
The GOP’s prescription for that weak economy — further austerity — is exactly the sort of “solution” that worsens our nation’s economic outlook. Wrote JP Morgan in a note to investors, “The deal does nothing to extend the various stimulus measures which will expire next year: We continue to believe federal fiscal policy will subtract around 1.5 percent-points from GDP growth in 2012.”
So remember that Boehner got 98 percent of what he wanted. If Obama merits any blame for our predicament, it’s for his capitulation to the Tea Party austerity agenda.
Moulitsas is the publisher and founder of Daily Kos.
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